QUESTION: My wife and I are retired and need money from our mutual funds. What will we pay in taxes?
ANSWER: Depending on your income, you might not have to pay any taxes on your gains. The on-again, off-again 0 percent long-term capital gains rate for taxpayers in the 10 percent and 15 percent tax brackets has been made permanent — and that could benefit a lot of retirees.
In 2013, married couples who file jointly qualify for the 0 percent capital gains rate if their taxable income is $72,500 or less; for single filers, the cutoff is $36,250. Rates for taxpayers in higher brackets range from 15 percent to 23.8 percent. Taxable income is what’s left after you subtract personal exemptions (worth $3,900 each in 2013 for you, your spouse and your dependents) plus your standard or itemized deductions from your adjusted gross income. If you don’t itemize, note that seniors 65 or older qualify for a larger standard deduction than younger taxpayers ($14,600 for married couples who are both 65 or older; $7,600 for single filers).
• The gains must be long term. To qualify for preferential treatment, you must hold your shares of stocks or mutual funds more than a year before you sell. In addition, the shares must be held in taxable accounts. Profits in tax-deferred retirement accounts, such as traditional IRAs, aren’t taxed until you take withdrawals.
• Your gains could lift you into a higher tax bracket. When you sell stocks or funds, the profits will increase your taxable income. To pay no taxes on the sale, you’ll have to calculate the amount of gains you can take before your income exceeds the threshold.
• Capital gains could increase taxes on Social Security benefits. Your adjusted gross income plays a critical role in how much, if any, of your Social Security benefits will be taxed. If your “provisional income” (your AGI plus 50 percent of your Social Security benefits plus any tax-free interest) exceeds $44,000 on a joint return, it’s likely that 85 percent of your benefits will be taxed. As you consider taking profits, remember that capital gains are included in the calculation, even if they’re tax-free, because they’re part of your AGI, says Mark Luscombe, federal tax analyst for CCH, a leading publisher of tax information. If you have provisional income of $44,000 or less, less than 85 percent of your benefits will be taxed. Alternatively, if you’re a recent retiree, taking advantage of the 0 percent tax break to generate tax-free income could enable you to postpone filing for Social Security, which can lead to higher lifetime benefits.Sandra Block is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, go to kiplinger.com.